A Better Way to R&D?

The pharmaceutical industry has been in the news a lot recently, criticized for the high cost of prescription medications and its worrisome reliance on blockbuster drugs. These challenges have a common root cause: declining research and development (R&D) productivity, which has led to an unfortunate but unavoidable focus on blockbusters. According to a recent U.S. Food and Drug Administration (FDA) report, since 1993 the industrys R&D expenditures have risen 250%, while the number of submissions to the FDA has dropped 71%. The cost per new approved drug has increased more than 800% since 1987, or 11% per year for almost two decades. In other words, the industry is spending more and more to deliver less and less. The result is not only rising medication prices. Whats more worrisome is that an increasing number of disease states are in danger of getting left behind because pharmaceutical companies simply cannot afford to research treatments for conditions that afflict too few people to constitute a profitable market. After decades of spectacular success, the Big Pharma business model seems decreasingly able to deliver economically viable compounds. But all is not gloom and doom on the pharmaceutical horizon. An especially promising new approach to the way R&D can be handled is being developed by a company called InnoCentive, a wholly owned subsidiary of the U.S.- based pharmaceutical giant Eli Lilly. InnoCentive cracks open the pharmaceutical industrys current research model, which features highly integrated R&D departments staffed by scores of scientists whose work is proprietary to the company that employs them. Instead, InnoCentive has created a distributed network of independent researchers scattered around the globe. Though the InnoCentive model still cant answer such big questions as How can we cure breast cancer?, early results have shown that because of scientific information garnered from InnoCentives network, client companies have been able to document 20-fold improvements in R&D productivity. Improvements of 100-fold and better promise to become an almost everyday occurrence. Worthy efforts, inadequate results Few in the industry are unaware of the magnitude of the R&D productivity problem, and many are working diligently to solve it. Three strategies are currently popular: (1) mergers and acquisitions (M&A)firms purchase the R&D pipelines of other organizations in order to drive revenue while hopefully cutting their own costs; (2) in-licensing new compoundscompanies buy the rights to use compounds that others have discovered rather than relying solely on drugs developed in-house; and (3) contract research organizations (CROs)firms primarily use these during Phase IIV clinical trials. Though each of these strategies has merit, none have yielded savings on a scale that would offset current (and future) R&D budget demands. Successful mergers have captured some economies of scale in sales personnel, headquarters real estate, and research facilities, but the savings typically achieved fall far short of compensating for diminishing R&D productivity. Similarly, in-licensing is beneficial to the

licenser only if it receives compensation for the full cost of its development efforts. This means that licensees are paying for any failures a licenser might have encountered on the way to developing the product or process being licensed. Consequently, there is no structural improvement in research productivity. And CROs cant deliver the level of economization the industry needs either: currently, CRO-driven savings are variously estimated at up to $133 million on costs of $800 million$1.7 billion in total drug development costs. These are surely savings worth having, but at the high end of drug development cost estimates, the impact amounts to a reduction of less than 8%. Unfortunately, then, despite well-intentioned effort and any money saved so far, the underling pathologydismal productivityremains. A new R&D model InnoCentive was launched in 2001 by Lilly to open up the traditionally closed loop of defining and solving a scientific research problem. At its heart, the business proposition is simple: InnoCentive connects Seekers with Solvers via its Web site. Seekers are InnoCentives clients: large pharmaceutical companies such as Eli Lilly, consumer products firms such as Procter & Gamble, and industrial chemical organizations such as Dow. Seekers have a problem to solve: they need a particular synthetic route to a compound, an assay developed, or an analytical method or a compound formulation. InnoCentives Web-based network of Solvers numbers more than 80,000, from (at last count) 173 countries. Solvers include retired scientists, academics, and inveterate independent tinkerers with a passion for finding answers. Seekers describe a problem, and define what qualifies as a suitable answer, along with a bounty, the amount they will pay for that answer. For example, one Seeker needed an efficient synthetic strategy for a given butanoic acid derivative, and offered $25,000 for the answer. In order to qualify for the reward, the synthesis had to require no more than two steps, produce greater than an 80% overall yield, provide greater than 95% purity, be cost effective, and deliver at least 2.0 g of final product. It is important to note that the Seeker pays only for success. What protects Solvers from chasing rainbowsand hence makes InnoCentive far different from in-licensing is that Solvers can search through the problems that have been posted, and respond only to those queries that match their area of expertise. In other words, Solvers need only swing at pitches they think they can hit. InnoCentive uses a variety of marketing approaches to build this Solver community. The company sponsors relevant scientific events and has a presence at conferences that potential Solvers might attend. It also publishes challenges in selected scientific publications, and collaborates with academic and research institutions. InnoCentive gets a small posting fee for each problem listed and also collects from each Seeker an annual access fee that gives the Seeker the right to use the InnoCentive network and get help from the companys scientific staff in clearly defining and articulating questions. InnoCentive also collects a commission when a solution is chosen.

But is it disruptive? What constitutes a bona fide disruptive innovation has been well defined. Disruptions begin life as a less for less proposition, comparing poorly with solutions offered by incumbents. However, they are able to find a foothold by providing a valuable product or service to the least demanding tiers of the market. They then improve without sacrificing their cost advantages and compete for mainstream markets from a position of structural advantage. InnoCentive is clearly worse than an in-house R&D staff: Solvers can work out only those problems that Seeker clients can precisely and clearly articulate. At present, these conditions characterize a fairly low percentage of the challenges pharmaceutical companies face when attempting to bring a new compound to market. For the most part, the questions to be solved are still too ill defined and poorly understood to be outsourced. Companies still need to be able to build upon initial conjectures, learning from the inevitable blind alleys they go down as they work toward a basic understanding of even just the question they are trying to answer. Consequently, a tightly integrated and well-resourced internal R&D function is critical to finding viable solutions. Thus, InnoCentive is no substitute for the existing R&D model for questions that resist precise definition. A Seeker could hardly post a question such as What is the cure for breast cancer? and hope to get an answerat any price. A foothold market For now, Seekers are limited to posting problems that can be articulated clearly and that have criteria for resolution that can be objectively evaluated by InnoCentive as the independent third party. Throughout InnoCentives first year, Seekers turned to the company largely for assistance with organicsynthesis problems because they were easy to define in terms of cost, yield, purity, scalability, and material supply. What intrigued InnoCentive management was that, in many cases, Seekers had already found solutions to the problems they posted, sometimes after months or even years of effort, with a concomitant financial investment. Seekers seemed to take the view that, with so much money already invested in the problem, another $25,000 or $50,000 just to see what was out there was a prudent insurance policy. Despite being able to address only a very small subset of the research challenges faced by pharmaceutical companies, InnoCentive has already been able to demonstrate enormous value for its Seeker clients. An independent economic analysis was done for InnoCentive and a Seeker client for a set of process-improvement problems consisting of 12 discrete chemistry challenges. Investigators concluded that the gross value created on these 12 challenges was approximately $10.3 million. To achieve these returns, the Seeker awarded $333,500 in bounties, with additional internal costs of less than $60,000, for a total estimated cost of less than $400,000. This is a return on R&D investment of >2,175%, or value in excess of 20 times the initial investment. What makes this kind of return more amazing is that because of the bounty structure InnoCentive has in place, Seekers pay only for

successes. Although not every posted problem elicits an answer, non-responses cost $0much less than a failed R&D initiative launched in-house. The up-market march InnoCentive would be no more than a useful niche solution if all it could ever provide were nice to have insights purchased at minimal cost. However, true disruption requires a way to get better without undermining the advantages that allowed the foothold market to be served profitably in the first place. There is strong evidence that InnoCentive is doing precisely this. As a result of its initial success, InnoCentive is now keenly motivated to expand the range of questions it can answer. In the short run, this has meant moving from comparatively simple problems that Seekers have already solved to comparatively simple problems that Seekers have not yet solved. Achieving this has motivated InnoCentive to discover how to teach Seekers ways to define seemingly intractable problems more simply, and break large challenges into a series of smaller obstacles. For example, one Seeker was looking for its next-generation commercial product. Through the kind of problem analysis at which InnoCentive has become expert, a single question was identified as a critical element of any further investigations. The company had determined that novel molecules with the ability to spontaneously break protein cross-links were critical to the answer. Posting this linchpin question on InnoCentive yielded a solution that offered a completely new direction for the heretofore stalled program. The solution provided a new mechanism for breaking protein crosslinks as well as a class of molecules that would work via this new mechanism. Not only is InnoCentive fuelling its own up-market march through improvements in problem definition, but the Seekers and the Solvers are also improving. There is evidence that InnoCentives Solver community is a self-organizing network of researchers, combining their expertise in order to tackle particularly thorny problems. As Seekers get better at deconstructing increasingly complex problems into discrete components, the Solver community is getting better at tackling more complex challenges. Full-scale disruption Its worth remembering that disruption is more a process than a single event. It thus follows that InnoCentive will have disrupted in-house R&D when pharmaceutical company executives feel that, for any given research question, InnoCentive is a viable alternative, even if it is not the alternative always chosen. The industry will realize the benefits of InnoCentives disruptive quality when R&D expenditures begin to plummet even as output rises dramatically. Although a successful disruption by InnoCentive might seem to spell bad news for incumbents, the InnoCentive model may actually serve to more deeply entrench the dominance and profitability of existing in-house R&D at pharma firms, if they manage the transition properly. This is counter to the standard disruptive scenario, in which new entrants eventually eviscerate incumbents.

In the case of InnoCentive, incumbent pharmaceutical companies are actually well positioned to benefit from this disruption-to-be. To do so, they must understand that the power of InnoCentive lies in relieving existing R&D functions of the expense of solving problems and instead focusing their prodigious resources and talents on what really drives value: defining the problems. The value in this industry structure rests squarely with those who define the problems because no new compound or manufacturing process turns on a single unknown. There are always numerous questions that must be answered in specific ways. Identifying and articulating those myriad questionsand the particular types of answersrequired to create a breakthrough treatment for Alzheimers is the hard part. Once thats done, InnoCentive can find the answers with comparative ease.

Based in Toronto, Michael E. Raynor is a director in Deloitte Research, the thought leadership arm of Deloitte, and coauthor of The Innovators Solution. Jill A. Panetta, M.D., is the chief scientific officer and a cofounder of InnoCentive. This article appeared in the March 2005 issue of Strategy & Innovation.